While we seem to be living in unique economic times, perhaps the landscape is not as different as we may think. I came across a letter Sir John Templeton wrote to clients during the 1954 recession that makes me think of his famous advice that the four most dangerous words in investing are “this time it’s different.” At stock market tops and bottoms, investors invariably use this rationale to justify their emotion-driven decisions.
Sir John penned:
- “If high interest rates were available on top-quality bonds or good yields on high-grade preferred stocks, then these investors might use those means of investment… The yields on bonds and preferred stock are low now.
- …The prices of top-quality common stocks have been bid up much more than the prices of medium and lower-quality common stocks…
- …A greater ultimate reward may be achieved by searching now for those stocks which are not regarded as top-quality now, but may gain that reputation within a few years. Such stocks can be bought at much lower prices; and then later an improving reputation may lead to… improving prices…
- …Another policy which may be successful in selecting stocks is to purchase those which may have medium quality but increasing earnings…”
—Sir John Templeton, 29 July, 1954
Sir John recommended focusing on companies with improving businesses at sensible prices, and to manage risk, avoid both high-quality companies at very high prices and low-quality businesses at giveaway prices. He thought uninvested cash is “idle cash.” Managing for growth is as compulsory now for good active management as it was in 1954. I believe Sir John would recognize today’s economic environment as another opportunity for active equity investors.
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